I have been trying to understand this for a while and think I am partially there so here goes. For this thread I will refer to real money and bank money the reasons should be apparent. Around 3% of the ãs in circulation are real money. When you borrow money from a bank in any way the money you borrow is bank money and all bank accounts contain bank money not real money, bank money is essentially an IOU from the bank, this is because banks do not loan out money that is deposited by savers but give out bank money.
ie. person A builds a house and sells it to person B, person B gets a mortgage for ã300,000 from bank 1. Bank 1 then credits person A's account with bank 2 ã300,000 that didn't exist before and person B owes bank 1 300,000+interest. In this case the banks as a whole now now owe person A ã300,000 and are owed ã300,000 by person B and ã300,000 are now available to person A to spend that didn't exist before.
This is because the bank of England allows banks to lend more money than they have deposits this used to be on a fixed ratio but is now done by separate deals with each bank. So note how in example above bank 2 now has more money deposited than it did before so can now lend more in future based on a deposit of whats already bank money not real money so the banking industry as a whole the more they lend the more they are allowed to lend as long as the money stays in the banking industry. Only the bank of England can regulate the total money supply and the fact that lending money needs to be profitable for the banks.
This system basically works on the principle that the public are never going to withdraw all there money from the banking system at once, if they did it would cause a bank run like what happened in Greece. The difference being if it happened in the UK the bank of England could just print all the money needed to meet the requirements making all this bank money into real money while Greece being in the Euro can't.
What I don't yet know is if a bank has say 10 billion in deposits and say 100 billion it has loaned I assume the bank pays the base rate interest on 100 billion and gets it on 10 but I am not sure and also have no idea if this is the case what happens to the interest they pay.
Does this make sense and does anyone care?
ie. person A builds a house and sells it to person B, person B gets a mortgage for ã300,000 from bank 1. Bank 1 then credits person A's account with bank 2 ã300,000 that didn't exist before and person B owes bank 1 300,000+interest. In this case the banks as a whole now now owe person A ã300,000 and are owed ã300,000 by person B and ã300,000 are now available to person A to spend that didn't exist before.
This is because the bank of England allows banks to lend more money than they have deposits this used to be on a fixed ratio but is now done by separate deals with each bank. So note how in example above bank 2 now has more money deposited than it did before so can now lend more in future based on a deposit of whats already bank money not real money so the banking industry as a whole the more they lend the more they are allowed to lend as long as the money stays in the banking industry. Only the bank of England can regulate the total money supply and the fact that lending money needs to be profitable for the banks.
This system basically works on the principle that the public are never going to withdraw all there money from the banking system at once, if they did it would cause a bank run like what happened in Greece. The difference being if it happened in the UK the bank of England could just print all the money needed to meet the requirements making all this bank money into real money while Greece being in the Euro can't.
What I don't yet know is if a bank has say 10 billion in deposits and say 100 billion it has loaned I assume the bank pays the base rate interest on 100 billion and gets it on 10 but I am not sure and also have no idea if this is the case what happens to the interest they pay.
Does this make sense and does anyone care?
